The European Central Bank's government bond purchases came to a halt last week for the first time since August, in a sign the emergency debt buying programme is being wound down.
The ECB’s inactivity reflects improved market conditions, which have been aided by the central bank’s three-year liquidity operation in December that averted a credit crunch in the eurozone. The ECB has more or less frozen the programme in the past few weeks after eurozone bonds have seen a sharp rally following the offer of three-year loans to the region’s banks on December 8.
Mario Draghi, ECB president, has sought to run down the bond buying, restarted in August after his predecessor Jean-Claude Trichet launched it in May 2010. Since the start of the programme, the ECB has spent €219.5 billion buying mainly southern European bonds. Critics of the Securities Markets Programme, as the bond buying is known, argue that it treads dangerously close to the ultimate ECB taboo of financing eurozone governments.
The ECB’s defence of its own holdings could undermine confidence in other eurozone bond markets because of the preferential treatment it has secured.
If the ECB refuses to accept outright losses on its Greek bonds, it would be another reason for investors to shun buying Athens’ debt. Their bonds would be in effect junior to those held by the bank. It may also lead to investors shunning other peripheral bonds amid fears these may end up in similar negotiations.
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